The Potential Impact of the Japan Disaster – an Update

Chemical companies, Consumer demand, Economic growth, Futures trading

Japan2.pngSadly, the blog needs to update its March 16 post, which analysed the potential impact of the Japan disaster. Earlier hopes of a quick end to the problems have proved false:•250000 people are now in refugee accommodation•The death toll is still rising, and is likely to reach at least 18000•The head of the International Atomic Energy Agency says we are “still far from the end of the accident” at the Fukushima Daiichi nuclear plant.

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Some in financial markets seem to regard current events as a ‘buying opportunity’. But the blog disagrees:•Japan is the world’s 3rd largest economy, and its electronics industry powers much of the equipment we now take for granted in our personal and working lives•Container shipping companies including Hapag-Lloyd and OOCL have stopped calling at Tokyo and Yokohama•Radiation was found on a Mitsui OSK ship that had been 80 miles (128km) from the problem area•Europe’s auto suppliers association fears “the return to normal production levels may take months, and cost €bns of lost revenue“•Bosch, the world’s largest component company, says “it can’t predict whether it will be able to secure component supplies beyond the end of this week”.As the Wall Street Journal map above shows, the US has now set a much wider evacuation zone (red dots) than the Japanese government (black dots). The US Navy was told Friday to stay 100 nautical miles away from the Fukushima plant, and yesterday the US embassy began handing out potassium iodide tablets in Tokyo.And, of course, the problem of rolling electricity cutbacks across Japan continues. People have cut down heating, and train services have been cancelled, to try and conserve power. But damaged refineries and wrecked power stations cannot be replaced quickly. Whilst European and Asian diesel fuel prices have jumped 20% as a result of the crisis.

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In terms of the Scenarios outlined on March 16, it now seems unlikely that we are going to see a Short-term Recovery Scenario. This has potentially very serious implications for industry:•Many companies operate within extended global supply chains. It is therefore not easy to determine what components might be impacted. China, for example, is often the final assembler of goods for the West, but Japan is the key supplier in terms of the critical components.•Some companies, such as Hewlett Packard and GM, have been well aware of the risks since the disaster began. But many may have been lulled into complacency by official statements. •Japan pioneered the Just-In-Time approach to manufacturing. No shortages of critical components have yet been reported, but they may well now start to occur, as current inventories are exhausted.Companies therefore need to quickly establish high-level Action Teams, reporting to senior management. Their remit should be to understand the implications of a move into either the Medium-term Rebuilding or (hopefully never to be needed) the Long-term Damage Scenarios. We can, of course, all hope that a quick solution to current problems may be found. But in today’s increasingly uncertain world, Boards will know that hope is not a strategy, or a sensible contingency plan.

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